Red Capitalism Faltering——–The Crash Resumes

Is there anything the Chinese authorities haven’t tried yet in their attempt to manipulate the Shanghai stock market back up again? Off the cuff there’s nothing we can think of, except maybe shutting the market down entirely.

As we have previously pointed out, Chinese investors have fallen prey to the “potent directors fallacy” (a fortuitous term once coined by Robert Prechter) – in fact, China is currently a prime example of this fallacy in action. The term essentially describes the misguided belief that political authorities can somehow suspend economic laws or will always be successful in manipulating financial market trends.

A Chinese retail investor, evidently shocked that the potent directors still can’t keep prices from falling

Photo credit: China Daily / REUTERS


The truth is that they can never stop a primary trend from unfolding. This is not to say that they cannot succeed in manipulating market prices at all – in fact, they will usually succeed in doing so over quite lengthy time periods. Given that the authorities have control over money supply growth and administered interest rates, they can certainly provide the necessary tinder to make asset prices rise or stop them from rising. But preventing a decline of an overvalued bubble market in which thousands of inexperienced traders are long on margin is a very tall order indeed, and the actions taken by the authorities appear to be backfiring in this case.


The Shanghai Composite falls by nearly 8.5% overnight – click to enlarge.

The biggest mistake the authorities made was to ban

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